What is an ISA?

An Individual Saving Plan (also known as an ISA) is simply a savings account which is exempt from tax. They were introduced to the UK in April 1999 and now supersedes the previous tax free saving schemes such as Personal Equity Plans (also know as PEP's) and the Tax Exempt Special Savings Account (also known as TESSA's). PEP's were fully merged in April 2008 so any existing PEP's are now referred to as an ISA and are treated accordingly.

On a standard savings account a person who is charged tax at the higher rate can expect to pay 40% tax on any interest earned on their savings, compared to a basic tax payer who is charged at a rate of 20%. This can have a real impact on the amount of interest gained.

An ISA is a tax free investment but there's a limit of how much you're able to invest per tax year (6 April-5 April)

A good example of this is shown in the research conducted by Moneysupermarket.com, they found that a person who pays tax at the higher rate would be £6,000 better off if they invested their full ISA entitlement every year, starting from 1999, into a cash ISA as opposed to paying the same amount into a standard account. A person from the basic tax level doing the same thing could expect to be £3,000 better off. This is quite a saving!

ISA's are definitely a saving scheme to consider as they can be used for a variety of reasons such as;